Frederick Vettese is former chief actuary of a national consulting firm and also the author of Retirement Income for Life: Getting More without Saving More.
With the federal election looming, it is a good time to assess the government’s stewardship of the country’s retirement income system. In a nutshell, today’s seniors are doing relatively well but that won’t be the case in 25 years, even with the recent expansion of the Canada/Quebec Pension Plan. Too many pension dollars are going to civil servants and not enough for other taxpayers. Here is a short list of what the federal government is doing wrong.
Not leading by example
Fewer than 10 per cent of private-sector workers are still covered by defined-benefit (DB) plans and since more than half of those plans are closed to new members, that number will eventually shrink to 5 per cent or less. DB plans are simply too risky. Even public-sector plans are softening their DB pension promises somewhat. The one glaring exception is the federal public-service pension plan (PSSP), which is sustainable for only one reason: Its pension promises are backstopped by all taxpayers, not just the half-million or so PSSP members. The cost of this hidden guarantee is massive (about $4-billion a year, by one estimate). The federal government should at least fall in line and move to defined-contribution pension plans for its own employees.
Keeping the playing field unlevel
The federal government helps Canadians prepare for retirement by allowing tax-deductible contributions to be made to pension plans and RRSPs. Not all Canadians are created equal though when it comes to tax assistance in saving. Employer and employee contributions for some public-sector workers total 30 per cent of pay. The 90 per cent or so of Canadians in the private sector who are not covered by a DB plan can salt away only 18 per cent of their earnings. To level the playing field, the government should either: (a) restrict total contributions within public-sector DB plans to 18 per cent of pay, and/or (b) allow all taxpayers to make greater tax-deductible contributions in their RRSPs.
Maintaining perverse incentives
Half a century ago, there were more than six working-age Canadians for every retiree. Now, there are just four and a generation from now it will almost certainly shrink to two. This makes an economic crisis almost inevitable. The government should be encouraging people to work longer, but it is doing the exact opposite with its own employees. Most civil servants continue to be able to retire by the age of 60 with a heavily subsidized pension. This perverse incentive is costing taxpayers billions a year. Of course, people should be able to retire whenever they want; they just shouldn’t expect assistance from other taxpayers to retire early.
Allowing OAS to get off-track
The previous Harper government enacted legislation to eventually raise the retirement age for old-age pensions from 65 to 67. One of the first actions of the Trudeau government was to reverse that legislation. While that action was popular with older voters, it runs contrary to what the rest of the developed world is doing. Almost everywhere, normal retirement within government programs is now 67 to 70 for the reasons mentioned in the previous point. The other problem with OAS is that the government is allowing it to shrink gradually in real terms. Today, the OAS pension equates to 13.5 per cent of the average national wage. In two generations, that will fall to 7 per cent unless the federal government takes action. This is happening because the maximum pension is indexed to the CPI, whereas it should be indexed to the national average wage, which tends to rise faster than CPI.
Poor implementation of the CPP enhancement
The enhancement to the Canada Pension Plan started off as a positive development. When it is fully phased in, CPP pensions will be up to 50 per cent larger. Unfortunately, the enhancement has been marred by poor implementation within public-sector pension plans. Previously, those plans had been integrated with the CPP, meaning pension promises were offset for the CPP pension so the overall pension was at an appropriate level. Instead of increasing the offset to recognize a bigger CPP, many public-sector plans are doing precisely the opposite: they are de-integrating, meaning they are stacking CPP on top of the pension benefit their plan pays. When it enhanced the CPP, the federal government could have forced all pension plans to integrate with the larger CPP benefit.
Some of these problems result in billions of tax dollars being spent unnecessarily, some perpetuate a situation of blatant unfairness and some run contrary to the country’s long-term economic health. The question is whether ordinary taxpayers will ever speak up in large enough numbers to demand corrective measures.